Estonia bets on defence manufacturing to revitalise its rural economy

From a control tower in central Estonia, a meter-long spy drone arced into the sky, a scene that captured both the country’s security anxieties and its economic aspirations. The demonstration, organised by parliament member Maido Ruusmann, was less about military procurement than about opportunity.

Ruusmann hopes that Skyassist, the Ukrainian drone maker behind the launch, will choose his hometown of Tõrva as a future production site.

"We need to be salesmen for our town. All local governments have to compete for people and investment,” he told Bloomberg. “The defence and drone industry is the industry of the future.”

Estonia’s tense relationship with Russia forms the backdrop to this push. Since regaining independence in 1991, the country has viewed its eastern neighbour warily, and Moscow’s renewed aggression has intensified those concerns. In response, Estonia has tripled its defence budget, from €776 million in 2022 to a projected €2.4 billion in 2026. 

Next year, defence spending will exceed 5% of GDP, the highest in Europe. While seen as essential, the buildup strains a country emerging from recession and grappling with the euro area’s highest inflation.

Tallinn is now trying to ensure that more of this money stays within the domestic economy. Leveraging its reputation as a startup hub, the government launched one of Europe’s first weapons-focused venture funds, worth €100 million.

The aim is to nurture a fast-growing ecosystem of defence startups, many founded by Ukrainians or tested on Ukrainian battlefields, and eventually attract international investment as European countries boost their military budgets.

For towns like Tõrva, a lakeside community of 2,600 with low average incomes and an economy long dominated by agriculture and timber, defense manufacturing presents a potential lifeline. Ruusmann had already been involved in plans for a €10 million industrial park when Skyassist approached him. Its Kyiv plant had been hit by a Russian strike, and the firm was seeking safer European sites.

As Skyassist CEO Igor Krynychko put it, “Unfortunately, there are no completely safe places in Ukraine today.”

Estonia’s defence sector is young — private weapons manufacturing was only legalised in 2018 — but it has expanded rapidly. The industry counts roughly 200 companies, including dronemaker Threod and unmanned systems builder Milrem. Sector sales jumped from €245 million in 2022 to €500 million in 2024, while defense-linked government spending reached €489 million this year. Banks, once wary, have become more open. 

“If you went to a bank five years ago to talk about making lethal weapons, they would send you away immediately,” said Jens Haug of explosives manufacturer Nitrotol. “They are much more accommodating now.”

Still, Estonia’s small size limits its ability to replicate the domestic procurement models of larger states. As researcher Nele Loorents noted, “The defence industry here needs to be international by its nature.”

Cooperation with major foreign manufacturers remains cautious; Tallinn recently declined a proposed Rheinmetall ammunition plant after finding the terms unfavourable.

To build strategic capacity, Estonia is establishing dedicated industrial parks for arms production. Two sites were selected in April, with government infrastructure spending of about €50 million and private investment expected to exceed €200 million. But these efforts face obstacles.

In Ermistu, local nonprofits and residents filed a lawsuit over environmental and noise concerns — delays that worry policymakers.

“We haven’t moved fast enough,” said national defense committee chair Kalev Stoicescu.

For Ukrainian firms used to wartime urgency, Europe’s regulatory environment is also challenging.

“The main challenge is the excessive bureaucracy of the European market,” Krynychko said. “Sometimes we see that some of the requirements of European licensing systems do not quite correspond to the requirements of real combat.”

By Sabina Mammadli